The City watchdog yesterday unveiled proposals to regulate the way banks treat their customers.

The Financial Services Authority said in a consultation document published today that it was “increasingly anomalous” that it did not regulate consumers’ core financial relationship.

The way banks treat their customers is not currently regulated, with the Banking Code Standards Board instead enforcing the voluntary Banking Code.

But the FSA said the board did not have the power to fine banks for non-compliance, while the code did not include an “overreaching fairness objective”.

It said there was scope for consumer detriment because this key sector was not covered by the FSA’s principle of treating customers fairly.

The regulator added that its proposed new framework would also include guidance on treating customers who got into financial difficulties fairly, a prompt and efficient service for consumers who wanted to switch their account to a different provider, and the disclosure of key information before, not after, an account was opened.

Jon Pain, FSA managing director of retail markets, said: “We believe that in order to ensure that the regulatory model is fit to meet these challenges, now and in the future, the FSA should regulate the wider aspects of everyday banking for all consumers.”

Next year the FSA will become responsible for regulating banks’ and building societies’ payment transactions under the Payment Services Directive.

But today’s review considers whether it would be more effective to extend this regulation to cover all aspects of banks’ relationships with customers, apart from unsecured credit, such as loans and credit cards, which would continue to be regulated by the Office of Fair Trading.

The FSA, which is asking for responses to its consultation by February 16, estimates that the new regulatory framework would cost £2 million a year, with one-off start up costs of between £3 million and £10 million.

The Financial Services Consumer Panel called on the FSA to regulate the banks at the earliest possible opportunity.

David Lipsey, chairman of the panel, said: “FSA regulation of retail banking is long overdue and the FSA’s consultation paper today with proposals to do so represents a breakthrough.

“The recent OFT market study on personal current accounts is a damning indictment of the banks’ recent treatment of consumers.

“Banks have shown themselves consistently unwilling to end charging practices which prey on vulnerable consumers.”